Industrial names including Boeing, 3M and Caterpillar — which have been some of those hardest hit by the recent trade dispute — were among the Dow's biggest drags.

The US markets' drop was not as steep as what was seen in late March and early April when the escalating trade rhetoric between China and the United States led to the S&P falling more than 2 per cent on four occasions.

The market slide may have been contained in part by speculation that the Trump administration could change its mind by the end of August, when the tariffs are due to come into effect, some strategists said.

It was even worse in Europe overnight, with the Paris, London and Frankfurt markets losing between 1.3 and 1.5 per cent each.

However, the worst performing market was the Shanghai composite, which tumbled 1.8 per cent.

Even if the latest tariffs against China are fully implemented, Deutsche Bank economist Zhiwei Zhang predicted the impact to "China's real economy is likely to be a hit of 0.3 per cent of GDP".

Deutsche Banks' economists have maintained their China economic forecasts of 6.6 per cent growth this year, and 6.3 per cent in 2019.

Australian dollar and commodities tumble

The Australian share market is expected to follow the wave of selling overseas, and start the day lower.

Amid the sea of red, the US dollar index rose moderately — up 0.7 per cent to a high of 94.77 against a basket of six rival currencies.

As a consequence, the Australian dollar fell sharply, down 1.2 per cent to 73.65 US cents. It also dropped to 55.8 British pence, 63.1 Euro cents and 82.5 Japanese yen.

"The Australian dollar is often seen as a liquid proxy option for emerging market exposure given the strong Australian economic links with China," said NAB's senior foreign exchange strategist Rodrigo Catril.

"Thus it is not surprising to see the Australian declining amid the current trade-driven global growth concerns.

"Add to that a small spike in the VIX index [+7.8pc to 13.63] … along with commodity declines from oil to copper … the London Metal Exchange Index [-2.5pc] … and gold, and you have the perfect recipe for a soft Australian dollar.

"We remain of the view that trade tensions are likely to get worse before they get better and as such we still see more downside risk for the Australian dollar."

The intensifying trade war between the world's biggest economies was also a drag on commodity markets.

Brent crude oil plunged 6 per cent to $US74.17 a barrel, its worst day in more than a year.

Oil traders were also focused on the possibility of surging supply, as Libya resolved a major disruption to its crude exports and Saudi Arabia reported a big jump in output for June.

Spot gold also suffered a fall, down 1.1 per cent to $US1,241.76 an ounce.

Copper fell 3 per cent to $US6,145/tonne, its lowest price in a year.

Iron ore is down 0.9 per cent to $US63.34 a tonne in China, while London Metals Exchange aluminium sank 1.4 per cent to $US2,060 a tonne.